Indirect Costs in Construction Contracting
Updated: Jun 23, 2020
Indirect Costs can cause hair loss
You know what I mean; trying to figure out what amount goes into which column can be a hair pulling adventure. And, making matters worse, indirect costs can mount in a hurry.
At first glance, it would seem differentiating a direct cost from an indirect cost would be somewhat intuitive. And, in one respect it is. Because, you can name the labor cost and the materials cost per job and you’ve got the foundation for your direct cost column.
Therefore, the rest should be easy, right? Anything on which money is spent and which isn’t a direct cost is quite obviously an indirect cost. Well . . . not so fast.
Indirect Costs accounting methods
There is more than one school of thought concerning how to handle job costing for indirect costs. They vary from “don’t do it” to “create several accounts depending on X factor,” and a few between. Of course, if you’re a commercial subcontractor and your bonding agent wants to see indirect costs on your job reports, and you say, “Oh we don’t mess with indirect costs,” you’re in for a rude awakening.
[In case you’re wondering which method we at Schulte and Schulte use, the answer is, “Which ever is the most appropriate for each individual client.” Yeah, we don’t believe in the one-size-fits-all method of dealing with our clients’ accounting needs.]
How it comes together
Dealing with indirect costs means determining things like fringe, general and administrative, and overhead then putting the numbers to use. It means you use appropriate tools strategically. And, it frequently means making your best estimate.
Indirect Costs can be a guessing game
So, if it is a guessing game – why bother? Right?
It is tempting to think the two words “accurate and estimates” could be counted as an oxymoron. Yet this article, Why Guessing Is Undervalued, suggests guessing is a huge part of our daily lives. And thoughtful guessing (estimating) is a skill worth developing.
Plus, think about this; guesstimates are the golden thread running through much of the construction contracting tapestry. From the beginning of the process, construction contractors take a unique set of variables, consider scope and feasibility, develop an “accurate estimate,” and call it a bid.
Taking into account we understand that close, just about, a little more (or less) than, and between are important and valuable words, it is also important to be able to determine a number which will satisfy several entities with whom you interact.
I’ve already mentioned that bonding agents want to see the numbers. So does your income tax preparer, the lending agency, the insurance provider, and the general contractors in your sphere.
Even more importantly, proper accounting for indirect costs allows you to receive appropriate tax deductions as well as make better business decisions.
How we can help
I’m just going to have to say it – the Schulte and Schulte team goal of helping our clients Run With the Big Dogs has a subheading titled “help them have peace of mind.”
Are you a construction contractor who needs help getting your indirect costs dilemma straightened out? Give us a call!
It is our desire this article (among our growing library of construction-centric informational articles) is helpful in assisting commercial construction contractors build better building businesses.
Providing Accounting, Contract Document Management, and Advisory Board Level counsel for small to medium commercial construction subcontractors.
So you can Run With the Big Dogs. Call us! 866-629-7735